The renewed focus on infrastructure development and the manufacturing sector offers opportunities across the logistics value chain, says Dr SAMANTAK DAS, Chief Economist & National Director-Research, Knight Frank India.
Large warehouses will become the way forward after the uniform GST regime comes into force. How do you see the road ahead for logistics providers and warehouse developers?
With the total warehousing space requirement in the country´s top seven markets expected to grow from 621 mn sq ft in 2016 to 839 mn sq ft by 2020, the warehousing sector has shown tremendous traction in the past couple of years. Further, investment in warehousing can provide an opportunity of realising returns in the range of 10-24 per cent per annum.
The renewed focus on infrastructure development and the manufacturing sector offers opportunities across the logistics value chain which has attracted the interest of international financial and development institutions and global institutional investors and developers. The improving regulatory environment for the Indian Real Estate Investment Trust (REIT), which also covers the warehousing segment, has added to this inclination. We believe that the warehousing sector is going to experience a sea change in its structure and will open up opportunities for real estate players in the coming years.
How should the industry gear up for the surge in demand for mega-warehousing post the uniform GST tax regime?
The Indian warehousing industry is highly fragmented and unorganised at present. It is still in the initial stage of development and has a long way to go to catch up with most of the advanced economies. However, we strongly believe that the industry is on the cusp of a turnaround and the current environment is likely to accelerate progress, considering the interest from government as well as private enterprises. The Government of India brought out the National Manufacturing Policy with the objective of increasing the share of manufacturing in GDP to 25 per cent. ´Make in India´, the government´s national initiative, places great importance on building best-in-class manufacturing infrastructure. Further, interstate industrial corridors, such as the ambitious Delhi-Mumbai Industrial Corridor (DMIC), and freight corridors, such as the Western and Eastern Dedicated Freight Corridors, are gaining renewed focus. All these efforts will have a substantial positive impact on the warehousing sector in India in the medium to long term.
From the short-term perspective, two important events are likely to propel growth in the warehousing sector of the country. First, the upcoming Goods and Services Tax (GST) Bill will amalgamate several Central and state taxes into a single tax, thereby mitigating double taxation and facilitating a unified national market. The sector will experience a structural change, backed by consolidation and operational efficiency. Second, the emergence of the ecommerce (e-tail) sector and the recent FDI relaxations brought in by the Government of India in the e-commerce marketplace will unleash a huge potential for the sector. In fact, the consumption (retail) led warehousing space demand will be driven majorly by the e-tail sector in the next couple of years. As per Knight Frank Research estimates, retail spending in the top seven cities will more than double to touch Rs.7,650 billion between 2014 and 2019, and e-tail´s share will increase from 2 per cent to 11 per cent - a jump of more than five times.
Keeping in mind both the short-term and long-term perspectives, the total warehousing space requirement (including manufacturing and consumption) in India´s top 7 cities is estimated to grow at a Compounded Annual Growth Rate (CAGR) of 8 per cent, from 621 mn sq ft in 2016 to more than 839 mn sq ft in 2020. In other words, these markets will witness the requirement of an additional 54 mn sq ft of storage space per annum till 2019.
The GST and flagship scheme of ´Make in India´ will make way for bigger warehouses across all states in India. Is ´Big´ going to be better business as far as warehousing is concerned? How will the scale of size of warehouses impact the warehousing and logistics businesses in India?
Balbirsingh Khalsa, National Director - Industrial, Knight Frank India says, ´The demand for warehousing is on the rise in the manufacturing and consumption sectors with the manufacturing sector dominating the overall space demand. Because of GST, there will be consolidation in the warehousing industry. Instead of state-wise warehouses, companies will consolidate into zone-wise larger warehouses. This will lead to a surge in demand of Grade ´A´ and large-sized warehouses which will ultimately result in an increase in rentals. The ambitious Delhi-Mumbai Industrial Corridor (DMIC), and freight corridors, such as the Western and Eastern Dedicated Freight Corridors, are gaining renewed focus, thereby giving a further fillip to the warehousing sector. Overall, we expect good growth in warehousing & logistics till 2020.´
The manufacturing sector is being encouraged with various initiatives by the Indian government. Can this help scale up manufacturing operations to increase this sector´s contribution to GDP to a share of 25 per cent as is ambitiously being propounded?
The increased efficiency in the logistics and warehousing sector will facilitate the manufacturing sector with respect to supply chain dynamics. However, for increasing the share of manufacturing, the Government of India has taken several steps such the ´Make in India´ initiative, implementation of GST, development of various industrial and dedicated freight corridors, etc.
How is the current scenario in the logistics industry - in terms of different transport modes (road, rail, air, and water), technology adoption, etc?
Indian businesses have long ignored the significance of the logistics segment, which continues to remain one of the most under-invested sectors in the country. While it undertakes the critical role of connecting production centres to consumption markets, inefficiencies in managing the sector could lead to a severe disruption in the entire supply chain network. In India, the logistics sector experience has not been very encouraging, leading to colossal losses during the entire transaction.
The logistics sector can be broadly classified into three areas - transportation, distribution and storage. In India, the transportation and distribution sectors have traditionally been a part of many studies, with numerous reports and findings affiliated to them. However, it is the storage and warehousing sector that has mainly remained under-researched. Although the warehousing segment constitutes only 15û35 per cent of the total logistics costs, its importance is significant with respect to the role it plays in the smooth functioning of supply chain networks.
Is there a high level of cash-based operations in the logistics and warehousing business operations? And how has the demonetisation exercise impacted the logistics and warehousing sector?
A large number of logistics companies depend on cash for their daily operations, whether it is paying of tolls, driver allowances, meals for drivers during transit and maintenance expenses. The demonetisation exercise has paralyzed the day-to-day operations of a large number of logistics players and this has resulted in short-term disruption of the entire supply chain. Even the warehousing sector, where many operators pay their daily labourers in cash, has been impacted due to this move. However, this is just a temporary setback and we expect operations to get back to normal post December with the availability of ample cash in the system. Recent initiatives by the government such as digital payment acceptance at all toll plazas and fuel pumps have already started showing their impact on the ground, with most of the logistics players moving towards a cashless system wherever it is possible.